Where Either a Borrower Or a Lender Can Be

[Joanne98]

Small-Business Owners Turn
To Online Networks for Funds
As Banks Tighten Credit
By JANE J. KIM

When Jeff Walsh wanted to refinance the small-business loan on his coin laundry, he didn't want to take a chance that his bank would reject his application. "I just bought a house in 2007 and was a little nervous about what the bank would say about my debt-to-income ratio."

Instead, the 31-year-old from Schaumburg, Ill., recently borrowed $22,500 on Prosper.com, an online lending network that matches individual borrowers and lenders. The interest rate on Mr. Walsh's loan: 10.25% -- several percentage points below what he says he would have had to pay at a bank.

Read a Q&A with the founder of Prosper.com.As the credit crisis spurs traditional lenders to tighten credit standards and raise fees, more small-business owners and entrepreneurs are turning to so-called person-to-person lending networks -- with names like Prosper, LendingClub.com and Zopa.com -- to help keep their businesses going. The unsecured loans are tiny, usually no more than $25,000. But borrowers say they are able to get loans more quickly and with less paperwork than at a bank. And people with good credit are able to lock in lower rates -- often 8% to 12% -- than they would otherwise have to pay on credit cards or unsecured bank loans.

Have you used peer-to-peer lending? Read the latest post, and share your thoughts.Person-to-person lending is a small but fast-growing corner of the Web economy. New sites are jumping in, including Virgin Money USA, majority-owned by Sir Richard Branson's Virgin Group PLC. Roughly $100 million in new P-to-P loans was issued in the U.S. last year, a number that is expected to jump tenfold by 2010, according to Online Banking Report. Recently, some larger financial institutions have begun to take notice of P-to-P lending, saying that offering loans through the sites is a way to bring in more deposits and reach more consumers.

Of course, as the economy slows, online lending faces the same default risks as bank lending. To shore up credit quality, Prosper is giving lenders more information than it did previously about borrowers' credit and employment histories. Some sites are making it easier than in the past for lenders to spread their investments across multiple loans, thus diversifying lending risk. And many of the newer players, such as GlobeFunder.com and LendingClub.com, are restricting loans to those with stronger credit, typically with credit scores above 640 or more.


Patrick Kelley of Lexington, Ky., used a Prosper loan to help fund his instant auctions and eBay consignment business.
Alex Kalempa recently applied for a $15,000 loan with Associated Banc-Corp.'s Associated Bank to help expand his business of developing racing shift systems for motorcycles. But the bank offered him only a $1,000 credit line, although it later increased it to $5,000. He also applied for a business credit card with Capital One Financial Corp., but was offered a credit line of just $500. Instead, Mr. Kalempa turned to LendingClub.com, where he got a $15,000 loan at 9.6% in January.

"Banks are getting stingier these days," says the 25-year-old in Slinger, Wis. "When I applied for a personal line of credit with Associated Bank five years ago, they gave me a $15,000 credit line with no problems." Continued>>>
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